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What is ‘Making Tax Digital’?

We live in a modern world filled with constant advances in technology. What used to be done manually can now be efficiently carried out online: many individuals and businesses prefer banking, bills payment and negotiating deals with customers or suppliers using the internet. This is a benefit of digitalisation and many people have come to appreciate it, especially those who are using accounting software.

Taking this into consideration, Her Majesty’s Revenue and Customs (HMRC) has started to put their effort into making their tax administration digitally advanced. ‘Making Tax Digital’ or MTD was a result of this aim. It will basically change how the tax system operates by revolutionising the current tax administration, making it more effective, efficient and easier for taxpayers to get their tax correctly. 

The gradual move to digital integration will phase out the need for paper-based transactions, giving businesses and agents more time to concentrate on maximising their business growth.   

Majority of businesses hire agents to manage their taxes and MTD still enable agents to carry out a full service to their existing and upcoming clients. 

The HMRC knows that most clients want to pay the right tax but the most recent tax gap figures show that many still commit avoidable errors, costing the Exchequer approximately £10 billion each year. Combining the advantages of accounting software and enhanced accuracy of digital records sent to the HMRC will decrease the amount of taxes that are lost due to these errors. 

While the HMRC was developing MTD, formal and informal consultations were made: a special focus was given to the pace of change which concerns small businesses. In response to this concern, a slow pace of mandate was implemented by the government in July 2017. Businesses that are VAT-registered are now mandated to use digital VAT records and send their returns through an MTD-compatible software in April 2019, especially if they have a turnover that is taxable above £85,000 (the VAT threshold).

The HMRC is also aware of the needs of VAT-registered businesses with complicated prerequisites. Their mandate was deferred until the service was fully tested. After full testing, they were required to join the digitisation. The mandation was only applicable to the following businesses; local authorities, ‘not for profit’ organisations that are not established as a company, public corporations, traders based overseas, those mandated to make payment on account, trusts, users of annual accounting scheme, VAT divisions and VAT groups. These businesses were required to keep digital VAT record and send their returns through the MTD-compatible software last 1 October 2019.   According to HMRC, “The primary legislation for MTD relating to VAT and Income Tax is contained in the Finance (No.2) Act 2017, providing certainty about the broad framework in which MTD will operate. The secondary legislation for VAT was laid in February 2018 and came into force in April 2019.”

How do I prepare?

If you are an agent and you need to inform your clients about MTD, just follow these steps.

  1. Determine if you and your client need to comply with the rules by checking this link.
  2. If you are required to use the MTD, use the right software from this list
  3. After choosing a compatible software, you can start creating an agent services account.
  4. After logging in to your agent services account, copy your list of existing client from the HMRC online services for agents account.
  5. You can start signing up your clients to MTD. You can manage their account details thereafter. 
  6. You can authorise your clients to access your agent services account. 
  7. You need to authorise your software before submitting digital VAT Returns. 

If you are a trader or business, these are the steps you should follow.

  1. Determine if you and your client need to comply with the rules by checking this link.
  2. If you are required to use the MTD, use the right software from this list
  3. Sign up an account Making Tax Digital for VAT.
  4. You need to authorise your software before submitting digital VAT Returns.

Is there a deadline?

Since 1 April, 2019, MTD has been implemented for businesses, landlords and other VAT-registered entities with VAT threshold of more than £85,000. Therefore, it an obligation for these entities to:

  • Keep business records in digital form
  • Submit VAT Returns to HMRC using MTD-compatible software
  • Submit Income Tax to HMRC quarterly (or more often), providing a summary of income and expenses using MTD-compatible software

The deadline of submission for VAT returns and processing payments are the same, along with monthly, quarterly and annual VAT return schemes. To reiterate, digital records must be kept and returns must be sent using MTD-compatible software. These are all applicable for businesses that utilise the Flat Rate Scheme for VAT.

If you are a business that prefers to pay your VAT through direct debit, do not sign up for MTD if your VAT return is due in 7 working days or 5 working days after it is due. You should ensure that your last direct debit has been charged from your bank before you sign up for MTD.

If you are currently hiring an agent, you can ask them about MTD. If you have an existing accounting software, talk to your software provider and ask them if it is compatible with MTD. You can review the ‘How do I prepare?’ section to check out the list of MTD VAT-compatible software.

No additional business records are needed to be kept because of MTD however, you need to digitise it to become MTD-complaint. For instance, if you are currently using spreadsheets, you must use MTD-compatible bridging software to submit all the required data that the HMRC needs. This kind of software allows your data from spreadsheets or other sources to be digitally transferred to HMRC.  

If you are a huge business utilising in-house software solutions, ensure that your IT department is aware of the things they need to do in order to make your company MTD-compliant: they can link your in-house software solutions directly to the APIs of HMRC or contact .

If you are a landlord, you can join MTD by taking into mind the need to keep digital records and send details to HMRC using MTD-compatible software. As always, all needed information can be accessed on www.gov.uk.

If you find MTD too complicated or you don’t have enough time to manage your own taxes, call on Nigel B Butler Ltd. They are a local chartered accountancy firm that has been working with small and medium-sized businesses in the Swindon area for over 25 years! 

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